Fed’s Fisher Says Too-Big-To-Fail Banks Need Restructure

Jan. 16 (Bloomberg) -- Federal Reserve Bank of Dallas
President Richard Fisher said banks deemed too big to fail must
be broken apart to prevent the next financial crisis from
happening.

“We recommend that TBTF financial institutions be
restructured into multiple business entities,” Fisher said in
the text of prepared remarks in Washington today. “Only the
resulting downsized commercial banking operations -- and not
shadow banking affiliates or the parent company -- would benefit
from the safety net of federal deposit insurance and access to
the Federal Reserve’s discount window.”

U.S. regulators are searching for ways to make the
financial system more resilient after the 2008 credit freeze led
to the worst U.S. recession since the 1930s. Implementing the
Dodd-Frank Act, an overhaul of the banking system that was
signed into law in 2010, is not enough to protect the country’s
financial system, Fisher said.

“We labor under the siren song of Dodd-Frank and the
recent run-up in the pricing of TBTF bank stocks and credit,
indulging in the illusion of hope that this complex legislation
will end too big to fail and right the banking system,” Fisher
said at the National Press Club.

Fisher has been criticizing what he has called the
“pathology” of banks deemed too big to fail since 2009.

JPMorgan Chase

The Government Accountability Office said this month that
it plans to study how large banks such as JPMorgan Chase & Co.,
Bank of America Corp. and Citigroup Inc. benefit from
assumptions that they are too big to fail. The examination will
be undertaken in response to a request from Senators David
Vitter, a Louisiana Republican, and Sherrod Brown, an Ohio
Democrat, who say the government hasn’t done enough to prevent
future bailouts.

Every customer, creditor and counterparty of shadow banking
affiliates should also be required to sign a statement that
acknowledges the fact that these entities are not protected by
the federal government, Fisher said today.

“The next financial crisis could cost more than two years
of economic output, borne by millions of U.S. taxpayers,” he
said.

In his speech today, the district bank president didn’t
comment on the outlook for monetary policy or the economy. He is
not a voting member of the Federal Open Market Committee this
year and has been one of the most outspoken critics of
additional monetary easing within the Fed.

Fisher told reporters after his remarks that the Fed’s
asset purchases haven’t been as effective as he would have liked
in boosting the economy, adding that those measures have become
less effective over time. This is partly because the too-big-to-fail problem has clogged the transmission mechanism between Fed
stimulus and the economy, he said.